Tag Archives: American Electric Power

U.S. EPA Announces Rules on Carbon Emissions: But the Real Payoff is in Spurring Technology Development and Deployment, Not a Binding Global Climate Deal

On Monday, U.S. Environmental Protection Agency (EPA) administrator Gina McCarthy revealed a “Clean Power Plan” to implement Obama administration’s proposal for reducing CO2 emissions from existing power plants down 30% from 2005 levels by 2030. The President had laid out the broad brushstrokes of the proposed regulations in his weekly address on Sunday. EPA’s announcement yesterday underscored that the rules are enforceable with specific targets for each state ranging from lower targets for coal-dominant states, like Kentucky at 23%, and for states with a cleaner energy mix, such as New York at 44%. The EPA rules are not prescriptive for specific technologies, but allow for flexibility by individual states in how they choose to achieve their targets. They can institute Renewable Portfolio Standards (RPS) like much of the Northeast, or set up carbon trading markets, including broad regional ones. Any such plan will include more renewables, both utility-scale and distributed. For some states, the targets may not be a heavy lift: For instance, analysis from the World Resources Institute indicates Minnesota can achieve a 31% reduction by continuing its existing RPS, increasing the use of combined cycle natural gas (currently operating at 11% capacity), and enforcing existing energy efficiency standards.

The EPA will enforce the new rules under section 111-d of the Clean Air Act, but is bound to face many legal challenges prior to that. However, if the U.S. Supreme Court acts on its own precedents set in Massachusetts vs EPA in 2007, the new rules will withstand the legal challenges. More serious challenges may be in the offing on the political front, particularly if a Republican takes the White House in the 2016 presidential election.

The new rules represent the most significant action taken by the U.S. government to address climate change to date, given that existing power plants account for 38% of the country’s carbon emissions, and complement the expected reductions in the transportation sector generated by the EPA’s increased fuel economy standards for automobiles, released in July 2011. This action has raised the hopes of international agencies like the United Nations Framework Convention on Climate Change (UNFCC) regarding a global climate deal in 2015.

These new rules, however impactful for the U.S. emissions, on their own are unlikely to have a dramatic impact on the global climate, given that almost all future growth in carbon emissions will come from developing and underdeveloped countries – most notably China, which became the largest carbon emitter in 2007. Hence much of the debate about the rules has centered on how likely they are to help induce China and other nations to agree to binding targets of their own. However, much of the discussion misses a critical point: Whatever their political importance, the rules will accelerate technology development and deploymentmaking it more practical and affordable for nations everywhere to reduce emissions. While their success is far from certain, their influence on innovation is where they will need to have the biggest impact for the world to achieve its CO2 reduction goals.

We predict four major technology sectors to get a boost:

  • Combined cycle gas turbines (CCGT) will gain greater ground

States will continue to look for decarbonizing fossil fuel power plants first, to ensure supply security and to use infrastructure the utilities have already invested in. The administrations’ earlier announced rules regulating CO2 from new power plants have already had some impact, contributing to the coal-to-gas switch for electricity generation. Firms like Platt are already predicting a significant rise in gas prices as a result of the new EPA rules. In this environment, expect that combined cycle gas turbines, which use energy from natural gas burning as well as steam generated from the hot exhaust gas, will rise in demand, given their higher efficiency at 50%, relative to 40% for regular thermal power plants. We anticipate CCGT giants like General Electric to benefit from this rise in demand.

  • Commercial- and utility-scale solar demand will rise in unexpected places

Subsidized internal rates of return (IRRs) are already high for commercial and utility solar installations in states like California and Massachusetts, ranging from 10% to 15% (see Lux Solar Demand Tracker — client registration required). However, the new carbon emissions rules will likely open up hitherto unattractive markets due to the lack of significant subsidies, such as Georgia and South Carolina, where we project IRRs between 2% and 5%. As the IRRs rise in the Southeast, expect a greater flow of debt capital and competing business models, such as leasing from SolarCity and solar loans from Sungage, to make their presence felt. Provided the states comply, the new rules will also make it more difficult for utilities to raise legal objections to increasing use of renewables in the energy mix (client registration required).

  • Negawatts will prove to be the cheapest compliance option for states and utilities

Saving electricity is considerably cheaper for a utility than producing it. A recent study (client registration required) from the American Council for Energy Efficient Economy (ACEEE) shows that the average cost of saving electricity across all the utility energy efficiency programs in the 20 U.S. states is 2.8 cents/kwh, two times cheaper than even coal power generation. The new rules will make the trade-off even more attractive by raising the cost of generation in coal-dominated states like Kentucky, Ohio, and Wyoming. Expect the utilities dominant in these regions, such as American Electric Power (AEP), to expand their residential energy efficiency programs, leading to the adoption of air barrier materials, light-emitting diode (LED) lights, and double-pane, low-e coated windows.

  • Carbon capture and sequestration (CCS) will get a new lease on life

Current costs of CCS using the incumbent integrated gasification combined cycle (IGCC) technology are an astounding $60/ton, according to the U.S. Department of Energy. Therefore, demonstration projects have been few and far between – and even when they do get commissioned, the capital costs are out of control: A case in point being the 582 MW Kemper CCS plant in Mississippi, where the capital costs now stand at an estimated $5.5 billion, compared to $2.4 billion originally budgeted. The new rules will likely accelerate the development of game-changer second- and third-generation CCS, such as use of metal organic frameworks (MOF), which have the potential to get the costs down to $20/ton.

The increased deployment of the above technologies will have an impact beyond the U.S. As CCGT and CCS technologies scale, expect developers like GE, Toshiba, Siemens, and Alstom to expand their footprint in India, China, South Africa, and Vietnam. Leading CCS research institutes in China, such as Huazhong University of Science and Technology, will partner with companies like the Sinopec group to commercialize the second- and third-generation technologies. A greater diversity of financing models will migrate to countries with attractive rates of return for solar projects, such as India. Utilities plagued with energy security issues (client registration required), such as Korea Electric Corporation (KEPCO), are already engaged in smart grid pilot projects and will likely start launching building energy conservation programs.

In short, the impact of the new EPA rules will neither come via a global binding climate deal nor from an absolute reduction in U.S. emissions, but from catalyzing technology development and deployment. Clients engaged in developing CCGT, CCS, solar, wind, and building energy efficiency solutions should take note and use the opportunity to deploy their technologies aggressively.

New energy technologies, renewable or not, hurt by regulatory uncertainty

GE and the University of Wyoming recently announced the delay of their $100 million clean coal research center. GE blamed its decision on low natural gas prices, unclear energy regulation, and lower energy consumption due to the recession. The center, set to come online in 2012, would have gasified coal into syngas (a mixture of CO and H2) for further conversion to electricity. GE will reevaluate the decision in 18 to 24 months.

This announcement comes on the heels of American Electric Power’s (AEP) cancellation of its $668 million commercial-scale carbon capture and sequestration (CCS) project. The “weak economy” and “Congress’ inability to act on climate policy” were cited as the reasons for cancellation. AEP already operates a pilot-scale CCS facility in West Virginia that captures 20 MW of carbon dioxide from the nearby coal power plant and buries it underground. The commercial project, half-funded by the federal government, would have expanded the facility to capture 220 MW of carbon dioxide (from a 1,300 MW plant).

Back in Wyoming, regulatory uncertainty has shelved 87 GW of proposed coal-based power generation in recent years. We have seen fickle government support crash the biodiesel industry,* slow the cellulosic ethanol industry,* pull the plug on the hydrogen economy,* and build an unpredictable solar market in Italy.* And with carbon legislation looming, but nowhere near ubiquitous, a lack of policy is hurting non-renewable energy as well. While governments continue the energy policy debate, clients should spend extra time and money to invest in alternative energy technologies that offer profitability without government support.

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